Investing in innovation must be higher on the Government's agenda

16 December 2013

The Federal Government’s decision to abandon two vitally important reforms that would have provided a much needed boost to investment in productivity-enhancing innovation in Australia is a major setback for our economic future, according to the Australian Private Equity and Venture Capital Association Limited (AVCAL).

At the weekend the Government confirmed that it will no longer proceed with targeted tax reforms relating to investment by small businesses in research and development and venture capital funding for new innovative start-up enterprises, that had been announced by the previous government in 2011 and in 2013.

“Abandoning these reforms is a major setback for Australia’s innovation agenda,” said AVCAL’s Chief Executive Officer, Yasser El-Ansary.

“Innovation is the engine room of our future economic growth, that’s why these two reforms are so important to our ability to lift the nation’s productivity and improve the wellbeing of Australians right across our community,” Mr El-Ansary added.

Under current tax rules, small businesses are required to wait up to 16 months after investing in research and development activities in order to receive support from the Government under the R&D tax regime, which means that most small businesses have to either outlay large cash amounts and wait for a prolonged period for a partial refund, or simply choose not to make the investment at all. The proposed reforms would have put cash back into the hands of small businesses on a quarterly basis, which would have significantly helped small business cash-flow and made the decision to invest in research and development easier.

The other change relates to tax rules that would have allowed Australian domestic investors in venture capital funds to co-invest with offshore investors and secure the same tax outcome.

“Over the last few weeks debate about public policy settings for the economic future of industry sectors such as manufacturing has been high on the Government’s agenda, so there was an extremely compelling argument for these reforms to be implemented as part of ensuring that we accelerate our focus on becoming a knowledge nation that backs innovation and start-up business,” said Mr El-Ansary. “These reforms would not have a significant net cost to the budget bottom line; in fact these reforms would likely lead to more tax revenue over time as investment increases and businesses become more profitable more quickly,” he added.

AVCAL does not believe waiting for the Government’s tax white paper process to consider these reforms is the right answer, because Australia is already facing an innovation deficit that must be addressed urgently.

"The Government’s own 2013 Innovation System Report identified that productivity growth – which we all agree is critically important for the future of our economy – is built on a strong pipeline of investment in innovation. We need to do a lot more in this country to support the creation of new industries; doing that will help to diversify our economic foundations and improve our capacity to withstand global economic shocks,” Mr El-Ansary said.

AVCAL will continue to advocate for these two important reforms to be implemented as a matter of priority in the period ahead.